CEE ECONOMY Ukraine crisis adds uncertainty for central Europe's manufacturers

PRAGUE, March 1 (Reuters) - Central European manufacturing sentiment remained strong in February, although Russia's invasion of Ukraine and the resulting slew of sanctions added new uncertainties for producers already grappling with supply chain disruptions and rising prices.

Central Europe's economies have limited export trade with Russia, which faces harsh Western sanctions for its actions in Ukraine, with Czech exports to the country only around 2% of its total.

Analysts say supply chain problems and rising commodity prices remain the bigger risk.

Czech carmaker Skoda Auto, part of Volkswagen Group, said on Tuesday it would limit some production due to a "critical supply shortage" of parts from several Ukrainian suppliers. read more

IHS Markit's Purchasing Managers' Index (PMI) for Poland edged up to 54.7 in February from 54.5 in January, remaining above the 50.0 line that separates growth from contraction. In the Czech Republic, the headline reading dropped to 56.5.

Hungary's PMI, published by the Association of Logistics, Purchasing and Inventory Management (MLBKT), rose to 53.2 in February from a revised 50.9 in January.

The February surveys do not reflect the impact of what Russia calls its "special operation" launched in Ukraine last week.

Erste Group Bank said the recovery may take a "more cautious form".

"Risks around the pandemic, high costs and supply chain bottlenecks continue, compounded by the current greater uncertainty created by the invasion of Ukraine."

Central European countries, many of which share a border with Ukraine, have already taken in hundreds of thousands of refugees fleeing the fighting.

The region's economies ended 2021 on a stronger-than-expected footing despite headwinds from soaring costs - especially for energy - which are driving consumer inflation and forcing central banks to hike interest rates.

Fighting in Ukraine is pushing up commodity prices even further, which will soon be felt by businesses. Ukraine and Russia are key suppliers of iron ore, for example.

"We can expect a further rise in energy prices, the rise of uncertainty, security concerns, high fluctuations in share markets, the growth of prices or shortages of several commodities, or a weak exchange rate," said Dagmar Kuchtova, the director general of the Czech Industry Confederation.

However, Kevin Daly, co-head of CEEMEA economics at Goldman Sachs, said the implications for inflation from the crisis are likely to be more severe than the implications for growth.

Reporting by Jason Hovet; Editing by Kirsten Donovan

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